The most amazing news today (to me at least) is that Bank of America absorbed Merrill Lynch. At what point does a standard bank become no different from an investment bank? B of A is FDIC insured. It has to have tons of bad paper on its books after that. I smell a shotgun wedding.

The rabbit hole behind this thing would have even Alice crying out for help.

Seriously. Merril Lynch failing? I used to see commercials for those guys when I watched CNN in High School. I'm looking at a debt that will resonate for the rest of my life, and a really uncomfortable next couple of years. I guess the positive about this will be the chance that my folks will be able to afford a house soon.

I feel like someone's just hit the shiny RESET button on the economy. Jesus.

Revel in the sheer improbability that in a universe of such mind-shattering emptiness, you have someone to love - Coldstream
They stopped being meaningful to me as devices a long time ago, and now they've stopped being meaningful as things-ClockworkHouse

What's amazing is that we'll likely spend billions bailing these idiots out yet the C's will keep their houses in the Hampton's :(

That was part of it. The other part was buyers not taking the time to understand their contracts beyond "free money." Not to "blame the victim" or anything... there's a lot of fault to go around in this one, is all.

I was watching CNBC this morning while the anchors and insiders were talking about Lehman and job losses on Wall Street. One of the anchors was indignant that the government could sit by and watch as thousands of people lost their jobs, and the first thought I had was all the times I've heard people on CNBC gloss over the loss of American manufacturing jobs to foreign outsourcing with references to the reality of economic efficiency and overpaid American workers. Problem is that reality has finally leaked into our financial system.

I was watching CNBC this morning while the anchors and insiders were talking about Lehman and job losses on Wall Street. One of the anchors was indignant that the government could sit by and watch as thousands of people lost their jobs, and the first thought I had was all the times I've heard people on CNBC gloss over the loss of American manufacturing jobs to foreign outsourcing with references to the reality of economic efficiency and overpaid American workers. Problem is that reality has finally leaked into our financial system.

I hate to sound like a communist but all this reminds me of Marx. Not the Stalinist hammer and sickle crap, the theory behind it all.

Marx said that the problem with Capitalism is that bigger companies can eat up smaller companies and grow even bigger, yet due to the way markets work, the history of a capitalist economy will be full of booms and busts. As Marx saw it, whenever there was a bust you'd get the hardier companies buying up the smaller ones until they got so big, no start-up could compete. Eventually, inevitably, there'd be a bust so big it would take out some of these behemoths and the result would be catastrophic. Enough to cause a revolution (and in comes Communism, because Marx also assumed the natural human response to losing everything is to get along).

Gorilla.800.lbs wrote:

Meanwhile all my pals @ Lehman are saying that they're being terminated without any packages -- Chapter 11 sees to that.

I'm actually going to be the contrarian here and say that the lack of a government response to this is actually encouraging. This demonstrates a willingness to let the market do what it should here and cull the overexpansion of irrational exuberance.

Japan, faced with the same decision in the 1980's, bailed out the bloated kleptocrats and paid for it to the tune of 15 years of recession.

We'll take our lumps in the short term, but the markets will be healthier for it.

It's very important to remember that there are several very guilty parties at the core of the whole sub prime lending domino disaster we're looking at, and they should share the blame equally.

First, as people have mentioned (hi bear!), financial institutions deciding that they could lend anything to anyone and hide the riskiness of such behavior from investors and shareholders through some insanely complex trickle down bucket theories that even I, who work in finance, barely understand.

Second, people who think a 40,000 annual salary deserves a 350,000.00 home and three porsches in the garage. I don't wanna sound too cruel, but they deserve to have their mansion repossesed.

Third, lenders who sell this lifestyle to middle class people because they're just going to re package these terrible loans to third parties for a tidy profit.

Fourth, investors in major financial institutions who saw the writing on the wall in 2004 and decided to ride out fake profits for a few more years.

I'm actually going to be the contrarian here and say that the lack of a government response to this is actually encouraging. This demonstrates a willingness to let the market do what it should here and cull the overexpansion of irrational exuberance.

Malor, what's your take? You've said in response to my posts that regulation won't have an effect, yet here is regulation leading to just what you have advocated as necessary medicine, the failure of two large financial institutions and the refusal of the government to back them up. So why isn't this a hard rain washing the scum off the streets, to paraphrase ol' Joe Strummer?

My impression is that this is exactly what you'd want to see, and also support for my point - regulation could have prevented most of these problems, and is helping to fix them. Right?

The two sides to every story are true and false, not yours and theirs. Facts are not political; lies are. - Deven Green (Mrs. Betty Bowers)

Yeah, actually, not bailing out LEH was one of the better decisions I've seen lately.

Some folks in the Metafilter thread (from which I blatantly stole the links, and probably should have linked to it -- I'll add it in now) think that BofA's buyout of Merrill is to get themselves into 'too big to fail' territory.

The problem that most people don't seem to understand, yet, is the sheer size of the books of these companies. Taken directly from the MeFi thread:

That means that on just 24 billion dollars in stockholder equity, they're the counterparties in over 4 TRILLION dollars in derivatives. That's a leverage ratio of 175 to 1!

That kind of leverage has never existed before, ever, and it's all over the industry. JP Morgan Chase is leveraged to a similar degree, and they're even bigger.

Now, it's not QUITE that simple. People will point out, correctly, that for every dollar they're exposed, they're probably hedged to someone else, which A) doubles the apparent book value, and B) reduces the exposure to zero.

But it DOESN'T, when the other counterparty fails. If JPM goes under, for instance, any paper they've written is probably worth maybe a cent on the dollar, meaning that people who were using them to hedge against are suddenly exposed.

It means that the entire system has become, essentially, one big entity, and they've all been pretending that everyone else is bearing all the risk, and the system is completely rotten with it. Derivatives transfer risk, but they also magnify it, because people will take on stupid trades when they think they're hedged by others. That's why all those dumb home loans were made, because at every step, everyone had counterparties, thought they faced little personal risk, and were all about funding people who couldn't pay back loans.

But it's not just home loans, that's just the first domino to fall. The entire system is rotten with this stuff. The entire system is a house of cards. We've disconnected our financial system from the actual economy, and it's run rampant, spinning off debt at unbelievable speeds. That's why prices went up so damn fast in housing, and that's why prices have been so unstable in the commodities markets. These entities can create instruments that look just like cash, and the Fed seems to be entirely unaware that the nature of money has changed, and has done absolutely nothing to contain or even understand what's going on.

And this was obvious even to a layperson. They've gotten lost in their own heads. They actually believe their models are real. They've forgotten that they're just models. The worship of Black-Scholes has gone malignant; Wall Street has turned into an enormous tumor that has sucked prodigious amounts of wealth out of the economy. They're able to do this because they came up with new abstractions for money, and the Fed, clueless, wasn't able to serve the purpose that a commodity currency would have. Instead of heeding the warnings that our paper currency was sending (the Mexican peso crisis, Long Term Capital Management, the Argentina meltdown, the Turkey meltdown), the Fed used that paper currency to ignore them all and keep doing what was making us sick.

This is why I think a commodity money standard of some kind is so critical, because it works even when bankers are stupid, or irrationally exuberant, or blinded by models. I don't care what it is, as long as it's something that can't be waved into existence to suit political whims. If we don't have something like that, which forces little but constant problems, we end up with enormous infrequent problems instead.

It's kind of like firefighting; we've prevented all economic forest fires, period, for the last 25+ years, and the economy is choked with underbrush. In forests, you need fires on a regular basis, and in economies, you need small crises, so that you don't get big ones.

In economics, stability is not necessarily your friend. Economic pain is like exercise; if we don't have any, we get fat and lazy.

"I've been playing Rebel Galaxy for the past few days. It has made me appreciate every other game in the genre more." -- Flintheart Glomgold

McCain promises to clean up Wall Street. Meh. He's already shown himself to be putty in the hands of financial sharpies. His defense during the Keating scandal was essentially, "I can't be guilty because I was too stupid about financial to know what was going on."

McCain cleaning up Wall Street......that's pretty funny. I'm sure it would remind him of a story about cleaning up his cell as a PoW.

Maybe Sarah could do it. She balanced her checkbook once, she's got the experience.

This mess is what happens when you give the Presidency, Senate and Congress to the Republicans for 6 years. Bush basically gave them the keys and they proceeded to total the economy. His strategy of market based control is fundamentally flawed and the deregulation of these bajillionaires assholes has caused this nightmare. I'm increasingly convinced that pure capitalism might be worse than Communism. Pure capitalism creates giant eating machines and levels of personal greed that would make Gordon Gecko blush.

I guess they've successfully redefined "trickle down economics". Now these massive financial failures will trickle down to the wallets of every single taxpayer.

“When I discovered a new plant, I sat down beside it for a minute or a day, to make its
acquaintance and hear what it had to tell.” -- John Muir

I can create a thread elsewhere if necessary, but I thought this thread might be an appropriate place to ask this question. I'm moving and have to find a new bank, but how I do I find out if the bank is on shaky ground?

Specifically, here are the banks in my neighborhood: Bank of America, Chase, WaMu, Fifth Third, and TCF. The last two have branches and ATMs in the area I currently live, which is the most convenient since I'll be back frequently to visit family.

With things as they are currently, I want to make a more informed choice about where I keep my money but don't know where to find that info.

JUST PUZZLED YOUR ASS UP, SON! -Mr Crinkle
If your hands get tired from button-mashing, remember that toes are the fingers of the feet. - Clemenstation
Schmi was a slave, right? Anakin's father is probably Thomas Jefferson. -Quintin_Stone

BoA's a good choice. like DS said, WaMu's probably the shakiest of the big banks.

What state are you in? I'd pimp the bank I work for (we're a major competitor of 5/3) -- and we are the highest capitalized bank in the country thanks to a 7 billion dollar cash infusion, but I'm not sure if you're in our footprint.

JUST PUZZLED YOUR ASS UP, SON! -Mr Crinkle
If your hands get tired from button-mashing, remember that toes are the fingers of the feet. - Clemenstation
Schmi was a slave, right? Anakin's father is probably Thomas Jefferson. -Quintin_Stone

This mess is what happens when you give the Presidency, Senate and Congress to the Republicans for 6 years. Bush basically gave them the keys and they proceeded to total the economy.

This isn't just the Republicans, Bear. We were set up for a massive failure and a lesser collapse in about 2001, from Clinton's bubble and ensuing disaster. We should have seen exactly what we're seeing now, but on a smaller scale, with less profound consequences. Obviously, that didn't happen. Why? Because the Fed stepped in with massive liquidity. Paired with an explosion of derivatives, this set off the debt and real estate bubbles. We ended up in the same place, but far worse than before, after seven more years of maladjustment.

The Bush administration honestly did less than Clinton did to screw things up. But, they didn't FIX things, either, when they could have. They deliberately took on massive debts, very probably with that idea of 'drowning government in a bathtub'. But they didn't actively manipulate the economy as it appears Clinton did.

Basically, Clinton f*cked us up. He's the one who sowed the seeds of the disaster. That boom we had in the 1990s? We haven't paid for it. Yet.

Bush made sure that we're in such a bad financial position that we can't do very much about it. He had a chance to try to fix things, but continued us down this massively destructive path. Things got many times worse on his watch, but his actions weren't directly the cause of them in the same way that Clinton's were. I got the impression that they were too dim to really know what was going on, but then again -- they did build all those empty internment camps in Texas, so maybe they do have a clue.

Greenspan is Villain Numero Uno. He would have done less damage to you if he'd personally visited your house and taken a flamethrower to half of everything you own. He's the guy you should be pissed at, more than any other.

"I've been playing Rebel Galaxy for the past few days. It has made me appreciate every other game in the genre more." -- Flintheart Glomgold

Specifically, here are the banks in my neighborhood: Bank of America, Chase, WaMu, Fifth Third, and TCF. The last two have branches and ATMs in the area I currently live, which is the most convenient since I'll be back frequently to visit family.

With things as they are currently, I want to make a more informed choice about where I keep my money but don't know where to find that info.

Find a local credit union. They have a totally different philosophy of business that is much more customer-oriented, and most of them aren't into the crazy stuff.

Malor, what's your take? You've said in response to my posts that regulation won't have an effect, yet here is regulation leading to just what you have advocated as necessary medicine, the failure of two large financial institutions and the refusal of the government to back them up. So why isn't this a hard rain washing the scum off the streets, to paraphrase ol' Joe Strummer?

My impression is that this is exactly what you'd want to see, and also support for my point - regulation could have prevented most of these problems, and is helping to fix them. Right?

I don't see any regulation going on here. What regulation are you speaking of?

McCain promises to clean up Wall Street. Meh. He's already shown himself to be putty in the hands of financial sharpies. His defense during the Keating scandal was essentially, "I can't be guilty because I was too stupid about finance to know what was going on."

So why isn't this a hard rain washing the scum off the streets, to paraphrase ol' Joe Strummer?

My impression is that this is exactly what you'd want to see, and also support for my point - regulation could have prevented most of these problems, and is helping to fix them. Right?

Oh, I think letting them fail is exactly the right thing to do. It's the only way we can get healthy again; we have to get rid of the failed business models. The problem, of course, is that we've been building on false pretenses for half a generation, and we're going to lose most or all of the fake growth that we thought happened. The result is going to be immense pain. Things are going to get A LOT worse.

I don't think regulation would have prevented the fundamental problem, inherent to derivatives, which is the assumption of a market that is always perfectly liquid. Once the Fed committed themselves to supporting that model, I don't think there's any regulation that could have stopped the ensuing bubbles and blowouts. Derivatives only work on the large scale in a fantasy world where wealth is unlimited. It isn't, but having the Fed backstopping the system provided that illusion, and made the economy react as though it was hedging against a larger economy that didn't actually exist. Now we're trying to call in those markers, and finding out there's nobody to pay them.

Limiting the amount of currency to fixed growth, and providing no emergency funds whatsoever under any circumstances, might give most of the benefits of commodity backing, but I just think having a commodity (or a basket) behind the currency is better, because that lets market forces work on providing it. When the cost of goods in the commodity is high, there's a natural urge for more of the commodity to be produced; when it's low, the producers reduce production or close outright.

We don't, after all, worry about the soap supply. It takes care of itself. Money doesn't need to be any different.

It's also worth pointing out that all the currency in the world carries an interest load, since all money is lent into circulation. Typically, that's four or five percent, at least over the last few years. That's a big drain on the economy, a massive transfer of wealth to banks. If we used commodities instead, our commodity storage and bill-printing costs would probably be on the order of a half-percent instead.

Reducing the interest load of money by 80% would seem a very good idea.

"I've been playing Rebel Galaxy for the past few days. It has made me appreciate every other game in the genre more." -- Flintheart Glomgold

What's interesting is watching Wall Street call for a fed cut by midweek. They aren't even being subtle about it. A trader was on CNBC this morning saying, "We're at 1200 in the S&P, and in the past that's about where the Fed has come in a cut rates. They can't delay." As though a lack of access to cheap borrowed money was the real problem with the system rather than a lack of knowledge about real values underlying balance sheets at the banks.